Kathie Bracy's Blog

A forum for Ohio educators, sharing thoughts regarding their health care and pension system (STRS Ohio). Researcher John Curry manages a clearinghouse of related e-mails, articles, announcements, etc. His daily mailings include many items that do not make it to this blog. Contact John (curryfeezer@yahoo.com) if you wish to be on his e-mail list. Kathie Bracy: kbb47@aol.com.

Saturday, August 07, 2010

Howls of protest can be expected from some quarters, but the Ohio Public Employees Retirement System is to be commended for taking steps to reform the pension fund’s beleaguered medical insurance benefit structure before it is overwhelmed by rising health-care costs.

OPERS is the pension fund for most state, county, municipal, and township employees, excluding schools, police, and fire. It has some 370,000 active members and about 140,000 retirees, a major part of Ohio’s workforce.

With health-care spending rising at double-digit levels for at least five years, and with its retiree ranks expected to double in number in 20 years, OPERS decided it could not afford to provide retiree health benefits indefinitely at current levels.

Those benefits are extremely generous, even though OPERS is not required by state law to provide them. Currently, a worker with as little as 10 years’ service can retire and receive health insurance fully paid by the state fund. It’s a benefit that most private-sector workers can only dream about, but it won’t last for long.

OPERS is considering changes, beginning in 2007, under which retirees with fewer years of service would pay substantially more for their insurance than those with greater longevity.

The proposal has different provisions for three groups in question: current retirees and those eligible to retire before Jan. 1, 2007; those eligible to retire after Jan. 1, 2007, and recent and future hires, specifically those who came to their jobs on or after Jan. 1, 2003.

In general, current and near retirees would feel the least of the benefit pinch, while those hired recently would have to plan to pay more for health coverage when they retire in the future. OPERS officials say the plan was set up that way in the interest of fairness, because current and near retirees have less time to “plan and save and adapt” to higher costs.

Coverage for spouses of retirees would cost more for everyone although the increase would be phased in over five years. To help pay for the changes, contributions by state and local governments will be increased, and employees will contribute 1.5 percent more of their salaries, from 8.5 percent to 10 percent, over three years.

Although complaints about the fairness of the plan inevitably will arise, it appears that OPERS has made every effort to make it equitable. Explanatory hearings, including one in Toledo, were conducted across the state in July.

How much does a COLA cut cost the retiree?

"But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years."

"Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings."

The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.

The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.

At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.

The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.

So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?

Consider what’s going on in Colorado — and what is likely to unfold in other states and municipalities around the country.

Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.

This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.

Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”

But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.

The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. “If something didn’t change, we would have run out of money in the foreseeable future,” he said. “So no one would have been paid anything.”

Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?

After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.

And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.

The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before.

But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years.

Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.

No one disputes these figures. Instead, they apologize. “All I can say is that I am sorry,” said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) “I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”

Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.

Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of Buyapension.com. A woman would need at least $928,000, because of her longer life expectancy.

Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?

If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.

If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it.

And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl.

“We have to do what unions call givebacks,” said Mr. Lamm, the former Colorado governor. “That’s the only way to sanity. Any other alternative, therein lies dragons.”

St. Paul, Minn. — Some of the state's former public employees hope to block changes made this year to the state's three largest pension systems.

A pending lawsuit claims the state is going back on a promise it made to tens of thousands of workers.

Richard Maus is part of the lawsuit challenging changes that were made this year to his teacher's pension. Maus spent most of his 26 years in the Robbinsdale School District and has been retired for 10 years. He said the state's pension system amounts to a contract that can't be changed.

"All the while I was teaching, I wasn't getting bonuses, I wasn't getting stock options - things like that," Maus said. "Instead I thought 'Okay, having a secure teaching job with a defined benefit program ... I'll take that.'"

This year's changes affect the state's three largest retirement funds. One is for teachers, that's what Maus is part of. The others are MSRS - which covers state employees - and PERA, which covers local municipal workers.

Roughly 144,000 retirees receive an average payment of between $1,300 and $2,300 a month, depending on which fund they're in, everyone from prison guards to police officers to assistant attorneys general.

Supporters say the changes were needed because the funds all took a hit when the stock market fell two years ago. Most money that is raised to pay out pensions comes from income made on investments.

Each pension fund is different, so the exact changes made this year vary. In general, current employees and employers will have to pay more into the fund, while retirees will get smaller increases in the yearly increases in their payouts. For retired teachers, payouts will be frozen for two years, starting next year.

Asking everyone to sacrifice was the fairest way to do it, said Laurie Hacking, the Executive Director of the Teachers Retirement Association of Minnesota. She calls this year's changes a preemptive move that will shore up the funds now in a way that prevents the need for a taxpayer-funded bailout much later.

"It simply would have been too risky to wait and expect that really positive investment returns would bail us out from this, or worse than that -- to expect the state to bail us out," Hacking said.

The lawsuit filed this summer only challenges the changes affecting retirees, not changes made for current employees. The suit asks whether a state can change the terms of a pension after a worker has started collecting it.

Stephen Pincus, one of the lawyers suing the state, said the state arguably had the ability at certain times during those peoples' working lives to make any adjustments.

"But once they took their retirement, the deal was set," he said. "And now it's not fair for them to go back on their commitments to their retirees."

Supporters of the changes say this isn't the first time they've changed the rules to ensure funds' solvency. State Sen. Don Betzold, DFL-Fridley, sponsored this year's changes in the state senate and said he thinks they'll stand.

"To say we can never change anything would create, I think, problems for the system," Betzold said. "I don't know how many employees would take much comfort in the fact that they're in an unfunded retirement plan."

Betzold also notes that the changes do not cut the amount retirees receive; they only change the yearly rate of increase.

This could also be a test case to gauge what courts will allow states to do to shore up their retirement funds, which has become a more pressing issue in states like Illinois and New Jersey.

About Me

A graduate of the Oberlin Conservatory of Music and the Baylor University School of Music, I am a professional symphony musician by background. I am also a retired elementary classroom teacher (nonmusic), having taught in the Alliance (OH) City Schools 2-1/2 years and the Columbus Public Schools 30 years. My first job was as harp instructor at The University of Texas; currently I am a Lecturer in Harp at The University of Mount Union. As a retired educator and a life member of a number of professional organizations, including the Ohio Retired Teachers Association and the Ohio Education Association-Retired, I also worked through CORE (Concerned Ohio Retired Educators, which officially disbanded 9/20/12) to help bring about badly needed reform in our teachers retirement system, STRS Ohio. My e-mail: kbb47@aol.com.